BrainTrust Query: Private Brand Evolution
Through a special arrangement,
presented here for discussion is a summary of a current article from the newmarketbuilders
blog.
The
terminology for retailer-owned brands has evolved over the years, as have the
brands’ premises and promises. Many in the retail industry stopped
at "private label" and still use that term as a catch-all, even as
retailers have deliberately evolved out of it. To retailers, however, it’s
not just wordplay, and "private label" and even "private brand" no
longer fully describe the options they intend to exercise.
The term "private
label" in particular feels anachronistic at a
time when better-than-national-brand formulations and packaging upgrades are
the price of entry (and by-the-way, not necessarily at entry-level prices)
and as direct-to-retail deals such as Cost Plus’ recent partnership with
Bed Bath & Beyond
and Sears’ groundbreaking decision to sell Craftsman tools in Ace Hardware
gain momentum.
It’s the latter examples that mark a major branding shift
that’s
been over thirty years in the making — an evolutionary leap that has retailer
brands not just diversifying within controlled environments, but migrating,
monetizing and multiplying. We’re calling these new brand beasts "prolifics"
and we expect them to roam Earth and ether for many years to come.
Canadian retailer
Loblaw’s arguably started all this back in the ’90s
when it first made its President’s Choice private label available to
U.S. retailers. Since then, many other international retailers such as the
U.K.’s
Boots and Spain’s Mango have done the same, the former selling its products
in Target’s beauty department and the latter opening shop-in-shops within
J.C. Penney. There were different ways of expanding their U.S. footprints without
hanging lots of shingles.
Another example is Safeway, which in 2008 formed
the Better Living Brands Alliance with the mission to "provide health
and wellness food and beverage solutions via two proven multi-category brands." In
2009, the company began selling its two brands, O Organics and Eating Right,
to other retailers including Price Chopper, Hy-Vee and, this year, Brookshire
Brothers. O Organics has surpassed $400 million in annual sales, making it
a top-selling organic brand. If turning former competitors into customers smacks
a bit of sleeping with the enemy, what a lucrative enemy it is!
The ultimate
effects are hard to gauge, but what undoubtedly will happen is that certain
retailers will prefer working with one another and will form solid connections.
Because of some retailers’ enormous influence, distribution
networks and scale, the brands they take "prolific" will become even more formidable
competitors to national brands and indelible in shoppers’ minds.
Discussion Questions
What’s the likelihood that “prolific” branding — selling house brands to other retailers — will become much more pervasive over the next few years? How do you think the trend will reshape the dynamics between national and store brands?
Great A&P initiated the selling of a private label brand to competitors when it began marketing its Eight O’clock coffees nationwide more than 20 years ago.
A wildly successful venture led to its sale in 2003 and resale several years later to Tata.
Eight O’clock coffee remains America’s best selling whole bean coffee.
Retailer consolidation has kept this trend from really taking off, and I see retailer consolidation continuing. So I’m not really bullish on this growing at a much faster pace than we see today. Let’s say I’ve been buying a brand from retailer X, who I don’t compete with in my market. Then I’m bought by another retailer who does in fact compete with Retailer X. I’ve seen it happen, a lot, and it explains why President’s Choice didn’t get as far as it would have liked in the U.S. There are times when these arrangements work, and work well for a long period of time, but this is not a slam-dunk.
Warren is right about retailer consolidation preventing the trend from gaining enough momentum to stick around. Also, with that consolidation came much larger retailer chains that are more likely and able to create and manage their own PL programs. The President’s Choice program was a pioneer to some degree however long before it arrived on the scene there were grocery wholesalers selling in-house private label programs to regional chains and smaller independent retailers. There were also companies such as Federated, Topco, and many others.
The dominant driver for private brand integration into category management schema is the gross margin incentive. Secondary, of course, is the differentiation possible with unique product offerings. However, it has been shown repeatedly that while consumers appreciate private brands, understand the value, and are willing to adopt…they don’t make store destination choices based on them. So in the end, it’s all about margin.
The drawback to buying a private brand developed by another retailer is that a middle man now exists, having an impact on the gross margin incentive. At scale, for a very large grocery retailer, the economics probably argue for internal development and management of private branding. Except…for niche areas.
Private branding is product development. The sad truth of product development is that almost the same amount of effort goes into developing products for niche markets as it does for mass markets. Which makes the activity around organics understandable. The same argument applies to most of the instances cited in the article.
That being said, it follows that private brand offerings in niche areas delivering some degree of gross margin incentive while providing quality product offerings will be attractive…the O Organic line is an example. It’s not economic for most retailers to have their own organic line. Not enough volume, too much work. The same goes for specialized HBA and apparel categories.
So…is there going to be a trend toward mass adoption of private brands developed elsewhere? Probably not, at least for the core assortment (and therefor the highest volume) SKUs.
The phenomenon Carol describes is both the inevitable evolution she characterizes and the conundrum Warren and David point out.
We have long argued that “brands” are entities that can be created and owned by anyone–not just manufacturers. Even most manufacturers “contract pack” some of the brands they sell. So the determinant in whether an entity could own a successful brand has nothing to do with what they make, but rather whether they have the skills to create and market a brand. Loblaws, and in particular Dave Nichols, did pioneer the development of these capabilities within a retailer.
Mid-tier manufacturers also used to pursue a branding strategy known as “control brands.” This was simply making a brand available to one retailer in each market exclusively and was often employed in selling to wholesalers. “Hy-Top” and “Top Choice” come to mind. There’s no reason a retailer can’t own a brand and pursue a similar strategy, and I think that’s where the “prolific brand” seems to fall.
But Warren and David correctly point out that the number of non-competing regional retailers has declined significantly, implying that for these “prolific brands” to become a major factor they would have to be made available to competing retailers within a market.
If that happens they could begin to fall into another category of brands Dave Nichols defined–“promiscuously distributed brands”–which was his nomenclature for national brands of the day. And his argument was that no retailer could successfully differentiate themselves in their market by stocking “promiscuously distributed brands.”
Another factor that comes into play here is psychology. Even if a retailer builds a brand that would benefit competitors businesses, just as “national brands” strive to, would Publix be just as happy to see the manufacturing margin of that brand go to Kroger as they are to see it go to Sara Lee or Dean Foods? In the accounting ledger it makes no difference–but in the executive ego it just might.
This is a new one to me and I hope I am not showing my ignorance of something that has happened without me even noticing. But…it would certainly surprise me if it happened in the UK as most retailers insist that manufacturers tweak recipes so that they can honestly say they are unique to each store.
Even when a similar product is sold at several price points within the same store, there has to be some difference in ingredients (sourcing, quantities, quality etc) to justify that differential. If the product is being made by a company also selling under their own name, their preference for anonymity is even stronger – nobody wants consumers to know that so many items are coming out of the same factory.
One exception is St Michael from Marks & Spencer which I think they have tried selling through other outlets. I don’t think it was a huge success and am not sure that it is still being done.
I’m guessing that the same principle applies to non-food products (especially clothes) that come from the same source but must somehow look and feel different depending on where they are sold. I do not envision any of our retailers selling their own label products to or through other retailers. Perhaps because we don’t have enough chains that are non-competitors?
Private brands are a key driver of store loyalty and a retailer that chooses to sell its private brand to another retailer is ultimately choosing not to compete in that market.
Private brands are also inextricably connected to the retail brand which means that an extension to a new market without the backing of the retail brand may leave these “prolific” private brands without an anchor. Canadian consumers connect President’s Choice with Loblaws in their minds. The ability to build a brand without the retail anchor increases the need for consumer marketing dollars and often undermines the margin advantage that private brands offer.
Many Canadian companies have tried to expand to the US and many have failed, so perhaps going “prolific” is a more cost effective expansion option.
The opportunity for a retailer brand to go “Prolific” is interesting. We have seen some retailers band together to build a “prolific” brand that all of them carry helping to build volume, lower price and increase quality.
With that said, I would caution retailers who are looking to expand the distribution of their Private Brand. As I have written in the past, a retailers Private Brand is what differentiates it from its competitors in the market. If I can start buying Trader Joe’s Trail mix and Coffee at Shop Rite do I really need to visit Trader Joe’s? Maybe not.
Growth of Private Brand is exciting, going “prolific” is interesting and only time will tell how it grows and impacts retailers and national brands.
There will always be exceptions, but Private Label for the most part will stay within the creating distributor. Yes we have multi-retailer Private Label including IGA, Piggly Wiggly and Shurfine. Smaller wholesalers combined buying power to support the volume required for Private Label.
Since those days, the industry has undergone considerable consolidation. We don’t have 100 wholesalers any more. The 100th largest supermarket has only has 13 stores. The problem for CPG companies is not retailer A’s private label selling in retailer B’s stores. Real new products and consumer communication are the both the problem and challenge.
This issue is not clarified by this article very well. The manufacturers who make the private label brands already sell these products (albeit to other retailers under their name). The manufacturer’s ability to rebrand products and maintain strict quality and performance controls are the reason why they offer offshoots of their main branded products under OEM or housebranded names. As these manufacturers become more saavy and develop globally strong abilities to provide their products against a competitive market place, we will see them become the provider of choice, not the retailer. Would you rather purchase your tires from a Michelin dealer (who supplies tires to GM, Ford, Chrysler, Honda, etc.) or from a competing car dealer?
A very, very interesting thread. Maybe it’s just semantics, but to me the moment that a retailer–either directly or through a subsidiary–sells a proprietary brand to another retailer, it is no longer a ‘private brand’, but yet another national brand.
I think the most pertinent point here is the one raised about margins. The primary driver of the growth of private brands has been the opportunity for a retailer to service the needs of their customers with a quality product at a higher margin than attainable through the retail sale of national brands. The moment that the retailer purchases the product from another retailer (or organization of any type), the increase in margin by directly sourcing the product is eliminated, thereby eliminating the most important benefit of a ‘private brand’ strategy in the first place.